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m Problems (See related pages) Problem 1-14A Cost Classification (LO2, LOS, LOG) Listed below are a number of costs typically found in organizations. 1. Property taxes, factory, 2. Boxes used for padcaging detergent produced by the company. 3. Salespersons' commissions. 4. Supervisor's salary, factory, E 5. Depredation, executive autos. 6. Wages of workers assembling computers, 7. Insurancs, finished goods warehouses 8. Lubricants for machines 9. Advertising costs. 10, Microchips used in producing calculators, 11. Shipping costs on merchandise sold. 12. Magazine subscriptions, factory lunchroom 13. Thread in a garment factory 14, Billing costs, 15, Executive life insuranos 16, Ink used in textbook production 17. Fringe benefits, assembly -ine workers. 18, Yam used in sweater production 19, Wages of receptionist, executive offices. Required: Prepare an answer sheet with column headings as shown below, For each cost item, indicate whether ¡t would be variable or fixed with respect to the number ofunits produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost, IFit is a manufacturing cost, indicate whether ¡t would typically be treated as a direct cost or an indirect cost with respect to units of product, Three sample answers are provided for illustration. Variable Selling Cost Item or Fixed Cost Direct labor v Executive salaries . . F x Factory rent F Administrative Cost Manufacturing (product) Cost Direct x Indirect x Problem 1-154 Working with Incomplete Data from the Income Statement and Schedule of Cost of Goods Manufactured (LO3, LO4) Supply the missing data in the following cases. Each case is independent of the others. Case , 1 3 3 4 Schedule of Cost of Goods Manufactured Direct materials... $ 4,500 $ 6/000 $:5/000 $ 3,000 Direct labor .....-..- ? 3,000 7,000 4,000 Manufacturing overhead . 5,000 4,000 2 9,000 Total manufacturing costs . .. 18,500 ? 20,000 ? Beginning work in process inventory 2,500 2 3,000 ? Ending work in process inventory . .. 1,000 4,000 3,000 Cost of goods manufactured . $18,000 $14,000 $ ? $? Income Statement SAÍOS or croatas +. $30,000 $21,000 $36,000 $40,000 Beginning finished goods inventory ...... 1,000 2,500 ? 2,000 Cost of goods manufactured . ? ? ? 17,500 ¡Goods available for sale... ? ? 2 ? Ending finished goods inventory . 2 1,500 4,000 3,500 Cost of goods sold ...... 17,000 ? 18,500 ? GIOSS MArgÍN ..ccococncrcoooorccoross 13,000 ? 17,500 2 Selling and administrative expenses . 3,500 2 ? Nat operating income. . 54000 $? $5 5,000 $ 9,000 Problem 1-16A Cost Classi tion and Cost Behavior (LO2, LO5, LOG) The Dorilane Company spedalizes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 patio sets per year, Annual cost data at full capacity follow: CHECK FIGURE Boxes for packaging; variable, direct CHECK FIGURE Case 1: Goods available for sale: $19,000 CHECK FIGURE (1) Total variable cost: $321,000 Factory labor, direct $118,000 Advertising 560,000 Factory supervision 540,000 Property taxes, factory building . $3,500 Sales commissions . 580,000 Insurance, factory $2,500 Depreciation, office equipment - 54,000 Lease cost, factory equipment . $12,000 Indlirect materials, factory . 56,000 Depreciation, factory building $10,000 General office supplies (billing) . $3,000 General office salaries 560,000 Direct materials used (wood, bolts, etc, . $94,000 Utilities, factory $20,000 Required: 1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above, Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect with respect to units of product.) : Selling or Cost Behavior Adminisentive Product Cost Cost Item Variable Fixed Cost Direct Indirect Factory labor,. ..... $118,000 $118,000 direct Advertising ..... $50,000 $50,000 1 Total the dollar amounts in each of the columns in (1) above. Compute the average product cost per patio set Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per patio set to increase, decrease, or remain unchanged? Explain. No computations are necessary Refer to the original data. The president's brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president if he could purchase a patio set from the Dorilane Company "at cost,” and the president agreed to let him do so. a. Would you expect any disagreement between the two men over the price the brother-in-law. should pay? Explain. What price does the president probably have in mind? The brother-in-law? b.. Since the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full, regular price to the brother-in-law and still be selling "at cost”? w > 4. a. Yes, the president may expect a minimum price of $153, which is the average cost to manufacture one set. He might expect a price even higher than this to cover a portion of the administrative costs as well. The brother-in-law probably is thinking of cost as including only direct materials, or, at most, direct materials and direct labor. Direct mate- rials alone would be only $47 per set, and direct materials and direct labor would be only $106. S The term is opportunity cost. The full, regular price of a set might be appropriate here, since the company is operating at full capacity, and this is the amount that must be given up (benefit forgone) to sell a set to the brother-in-law. Problem 1-17A Classification of Salary Cost as a Period or Product Cost (LO2) You have just been hired by Ogden Company to fill a new position that was created in response to rapid growth in sales. It is your responsibility to coordinate shipments of finished goods from the factory to distribution warehouses located in various parts of the United States so that goods will be available as orders are received from customers. The company is unsure how to classify your annual salary in its cost records. The company's cost analyst says that your salary should be classified as a manufacturing (product) cost; the controller says that it should be classified as a selling expense; and the president says that ¡it doesn't matter which way your salary cost is classified. Required: 1. Which viewpoint is correct? Why? 2. From the point of view of the reported net operating income for the year, is the president correct in his statement that it doesn't matter which way your salary cost is classified? Explain. Problem 2-19 (30 minutes) 1. Period Product Cost (saling Vari- Direct Mg. and Oppor- able Fxed Mate- Direct Over- admin] tunmity Sunk Neme ofthe Cost Cost Cost _ mals Labor head Cost Cost Cost Staci's current salary, $3,800 per month .... Xx Xx Building rent, $500 per month. Xx Xx Clay and glaze, $2 per pot. Xx Xx Wages of producion dial $8 per pot... Xx Xx Advertising, $600 per month. Xx Xx Sales commission, $4 per pot Xx Xx Rent of production equipment, $300 per month ..... Xx Xx Legal and filing fees, $500 . Xx Xx Xx Rent of sales office, $250 per month .. ems Xx Xx Phone for taking order, $40: per month .. a Xx Xx Interest lost on savi mes aunk $1,200 per year. x x 2. The $500 cost of incorporating the business is not a differential cost. Even though the cost was in- «curred to start the business, ¡tis a sunk cost. Whether Staci produces pottery or stays in her present job, she will have incurred this cost. Problem i1-19A Schedule of Cost of Goods Manufactured; Income Statement (LO3, LO4) Swift Company was organized on March 1 of the current year. After five months of start-up losses, management had expected to earn a profit during August. Management was disappointed, however, when th income statement for August also showed a loss. August's income statement follows: Swift Company Income Statement For the Month Ended August 31 SAMOS cococcccccnncr $450,000 Less operating expenses: Indirect labor cost . Utilities ... Direct labor cost .... Depreciation, factory equipment .. Raw materials purchased .... Depreciation, sales equipment Insurance ... Rent on facilities . . Selling and administrative salaries . Advertising .. 462,000 Netoperalingiloss: ¿iii acacia $ (12,000) After seeing the $12,000 loss for August, Swift's president stated, "I was sure we'd be profitable within six months, but our six months are up and this loss for August is even worse than July's. 1 think ¡it's time to stan looking for someone to buy out the company's assets—if we don't, within a few months there won't be any assets to sell. By the way, I don't see any reason to look for a new controller. We'll just limp along with Sam for the time being.” The company's controller resigned a month ago. Sam, a new inexperienced assistant in the controller's office prepared the income statement above. Additional information about the company follows: a. Some 60% of the ul jes cost and 75% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities. b. Inventory balances at the beginning and end of August were: August 31 Raw materialS .....o.oooommm.... $13,000 Work in process $21,000 Finished goods $60,000 Cc. Only 80% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities. The president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets. Required: 1. As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for August. 2. Asa second step, prepare a new income statement for August. 3. Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer? Problem 2-26 (60 minutes) L Swift Company Schedule of Cost of Goods Manufactured For the Month Ended August 31 Direct materials: Raw materials inventory, August 1... . $ 8,000 Add: Purchases of raw materials 20... 165,000 Raw materials available for use . sosammanras 173,000 Deduct: Raw materials inventory, August 3L.. 13,000 Raw materials used in td $160,000 Direct labor... 70,000 Manufacturing Over] Indirect labor cost... 12,000 Utilities (60% x $15, 000). 9,000 Depreciation, factory equipment 21,000 Insurance (75% x $4,000) ...... 3,000 Rent on facilities (80% x $50,000)... 40,000 Total overhead costs.. 85,000 Total manufacturing costs . AN 315,000 Add: Work in process inventory, Augus 16,000 331,000 Deduct: Work in process Es dd aa 31. 21,000 Cost of goods manufadured .. ona $310,000 1. Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the company's income statement for the year. 2. The company produced the equivalent of 40,000 units during the year. Compute the average cost per unit for direct materials used and the average cost per unit for rent on the factory building. 3. In the following year the company expects to produce 50,000 units. What average cost per unit and total cost would you expect to be incurred for direct materials? For rent on the factory building? (Assume that direct materials is a variable cost and that rent is a fixed cost.) 4. Explain to the president the reason for any difference in average cost per unit between (2) and (3) above. Superior Company l Schedule of Cost of Goods Manufactured For the Year Ended December 31 Direct materials: Raw materials inventory, beginning . $ 40,000 Add: Purchases of raw materials... 290,000 Raw materials available for use ......... 330,000 Deduct: Raw materials inventory, ending . 10,000 Raw materials used in production $320,000 Direct labor 93,000 * Manufacturing Insurance, factory 8,000 Utilities, factory .. 45,000 Indirect labor. 60,000 Cleaning supplie: 7,000 Rent, factory building . 120,000 Maintenance, factory 30,000 Total overhead costs .. 270,000 Total manufacturing costs (given 683,000 Add: Work in process inventory, beginning . 42,000 * 725,000 Dedud: Work in process memo ana: a 35,000 Cost of goods manufactured .. $690,000 The cost of goods sold section of the income statement follows: Finished goods inventory, beginning $ 50,000 Add: Cost of goods manufactured 690,000 * Goods available for sale (given) .. 740,000 Dedud: Finished goods inventory, ending 80,000 * Cost of goods sold (given) $660,000 These items must be computed by working backwards up through the statements. . Direct materials: $320,000 + 40,000 units = $8 per unit. Rent, factory building: $120,000 + 40,000 units = $3 per unit. Per Unit Total Direct materials. . $8.00 (Same) $400,000 ** (Changed) Rent, factory building ... $2.40 * (Changed) $120,000 (Same) * $120,000 + 50,000 units = $2.40 per unit. *x* $8 per unit x 50,000 units = $400,000. . The unit cost for rent dropped from $3.00 to $2.40, because of the in- crease in production between the two years. Since fixed costs do not change in total as the activity level changes, they will decrease on a unit basis as the activity level rises. Problem 1-21A Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior (LO3, LO4, LO5) Various cost and sales data for Meriwell Company for the just completed year follow: Finished goods inventory, beginning Finished goods inventory, ending | $40.01 Depreciation, factory | $27,000. Administrative expenses | $110,000. Utilities, factory Maintenance, factory Supplies, factory Insurance, factory Purchases of raw materials Raw materials inventory, beginning Raw materials inventory, ending required: il. 2. 3. The company produced the equivalent of 10,000 units of product during the year just completed. What Prepare a schedule of cost of goods manufactured. Prepare an income statement. was the average cost per unit for direct materials? What was the average cost per unit for factory depreciation? The company expects to produce 15,000 units of product during the coming year. What average cost per unit and what total cost would you expect the company to incur for direct materials at this level of activity? For factory depreciation? (In preparing your answer, assume that direct materials is a variable cost and that depreciation is a fixed cost; also assume that depreciation is computed on a straight-line basis.) Explain to the president any difference in the average cost per unit between (3) and (4) above.
